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The New Brazil
By Riordan Roett
Brookings Institution PressCopyright © 2010 Riordan Roett
All right reserved.
Chapter OneIntroduction: The New Brazil
An unpredictable process of economic and social reform that began with the election of Fernando Henrique Cardoso in 1994 will reach a plateau in 2010 with the successful conclusion of the presidency of Luiz Inácio (Lula) da Silva. Both presidencies deserve credit for taking the difficult decision to modernize the country and create the conditions for the emergence of the new Brazil. After the return to democracy in 1985, Brazil lost a decade with three mediocre, if well-meaning, presidents before Cardoso and a new team of economists were able to restart the economy and provide the framework for stable growth, social reform, and institutional stability.
The modernization process in Brazil has not been seamless. Mistakes have been made. Politics often have slowed the process of change, and indeed, as this book illustrates, while there has been real progress in the social and economic arenas, the political system is a long way from being classified as transparent and accountable. But, in part, the story of the new Brazil is that it has happened without-or in spite of-the "old" politics of patronage and corruption. While that too is changing slowly, a great deal of catch-up is needed in the twenty-first century.
After an introduction to the history of Brazil, which is essential to understanding what has transpired since 2004, this book analyzes the complex path to sustained growth that the country has taken. In part the success is due to external factors such as the high demand for Brazilian exports, particularly in China and the rest of Asia. But it also reflects sophisticated policy choices, including inflation targeting and maintenance of an autonomous central bank.
Brazil was one of the last of the emerging-market economies to be affected by the 2008-09 world financial and economic crisis. It was also one of the first to emerge relatively unscathed. That was as much due to careful management of the crisis by the Lula government as to the institutional reform process that began in 2004, which allowed the country to pursue countercyclical policies. It is now predicted that growth in Brazil and many of the emerging-market economies will outdistance that in the United States and the European Union in the immediate future. Brazil's GDP will probably grow more than 6 percent in 2010, compared to an average of 4.6 percent for Latin America, and it will benefit from a rebound in world commodity prices, recovering from a significant decline in late 2008.
Foreign direct investment (FDI) is also predicted to support Brazil's robust growth in 2010 and thereafter. It is estimated that Brazil will attract $35 billion in new investment in 2010, with sustained flows in the following years. The national unemployment rate is heading to historic lows given the rapid recovery of the economy after the crisis and the increase in consumer demand. With rapid growth, the authorities will need to monitor inflation carefully, but the innovative program of inflation targeting, in place for some years, should obviate any serious concern about out-of-control inflation.
The international image of Brazil has been enhanced by impressive oil and natural gas discoveries off the southeast coast, which will propel the country to become an important energy exporter within six to eight years. Brazil today is not only self-sufficient in oil production, but also the second largest producer of sugar-based ethanol, a biofuel that further enhances Brazil's position as an important player in the energy field worldwide.
The pragmatic management of the largest economy in Latin America has allowed the government to target poverty-if not inequality. The first poverty reduction programs were begun under the Cardoso administration and deepened under the Lula government. After some administrative difficulties, the Bolsa Família (Family Basket) program of conditional cash transfers has resulted in tens of millions of Brazilians moving out of absolute poverty and into the consumer market and the lower middle class for the first time since the discovery of the country in 1500. Although for some the Bolsa Família program is just another set of handouts, the majority of observers believe that the conditionality and the methodology employed ensure transparency and accountability. No matter the opinion of the analysts, the program has become extraordinarily popular and probably accounted for Lula's second-term election victory in 2006, as millions of Brazilians in the underdeveloped north and northeast regions voted for Lula, in some cases against entrenched, conservative interests. Given that reality, the new government, no matter which coalition is successful in the late 2010 election, will find it difficult, if not impossible, to tamper with Bolsa Família and will probably seek to expand its scope.
The successful economic reform program that has allowed the governments of Fernando Henrique Cardoso and Lula to address long-pending social issues has helped to consolidate the national political system. Although far from perfect, the political process works in Brazil. While at times somewhat populist in nature in the post-1985 era, since the election of President Cardoso in 1994 the dynamics of the political process have been impressive. Nationwide elections are carefully monitored. Up-to-date technology precludes doubts about the outcome. There are few, if any, serious challenges to the process at any level of government-national, state, or municipal. This says little about the quality of the candidates elected, but it does emphasize the capacity of the state to manage elections peacefully in a country of 190 million inhabitants.
As the reform program advanced after 1993-94, observers noted that changes in the international system were providing space for new emerging-market actors. One acronym-BRIC-came to characterize the rise of Brazil, Russia, India, and China as new players with expanding economic potential. The BRICs have slowly gained greater influence over the international decisionmaking process, which had been dominated by the major industrial countries-the G-7-since the end of World War II. The new group of international actors has strong differences-Brazil and India are vibrant democracies, Russia is considered a soft authoritarian state, and China remains a full-fledged communist state, but with an interesting market orientation. Since the start of the twenty-first century, there have been important points of convergence on broad issues such as a new global trade regime, a new financial architecture, and an expanded role of the BRIC countries in the workings of the multilateral financial institutions in Washington, such as the International Monetary Fund (IMF) and the World Bank.
Brazil's emergence as a new player in world affairs could not have been predicted just two decades ago. The historical context is highly relevant, of course. The cold war ended in 1989. The administration of President George H. W. Bush prudently and successfully faced down an aggressive dictator in Iraq to restore a modicum of stability in the Middle East. The United States stood as the only superpower in the world. And as many analysts have pointed out, the world was on the verge of the phenomenon of globalization. Thomas Friedman, for example, stated, "Globalization is not just a trend, not just a phenomenon, not just an economic fad. It is the international system that has replaced the cold-war system." Around that time, Michael Mandelbaum argued that a certain set of ideas had conquered the world in the twenty-first century: peace, democracy, and free markets. The Clinton administration, which took office in January 1993, embodied this new reality. For the new Democratic White House, technology was the key to managing and dominating the new era. While reluctant to call it an "American era," U.S. policymakers clearly believed that the country "owned" globalization. And if technology and knowledge were the drivers of the new era, it was clear to the White House that the United States would be the preeminent player on the field. It was widely believed that the American model had trumped all others.
The first report identifying Brazil, Russia, India, and China as the BRICs was published in 2001 by Goldman Sachs. Subsequent papers refined the concept and research on the BRICs. Although the Goldman Sachs analysis did not address the geopolitical and foreign policy aspects of the post-1989 world, it gave us another side of the prism. While the United States appeared to be the unqualified "winner" from the fall of communism, the new economic order that was emerging in the 1990s had profound political, social, and cultural implications. Although in an immediate sense it was about profit (particularly for U.S. multinationals and banks), as Bacevich states, globalization was ultimately about power: "On the surface it promised a new economic order that would benefit all. Beneath the surface it implied a reconfiguring of the international political order as well." This did not resonate with American political leaders who saw little, if any, obstacle to the spread of the American dream around the globe.
While there might have been other candidates for assuming the leadership of the rapidly developing economies, in coining the term BRICs, Goldman Sachs captured the imagination of analysts, investors, and ultimately journalists and policymakers. As the old order slowly evolved, the new order was not going to be as predictable as some analysts thought in the early years of the new century. This was the genius of the Goldman Sachs analysis. New players were emerging; as important, a new generation of leaders appeared in each of the four countries that embodied the shifting sands of the era. They were not, and could not be, members of the traditional G-7. But they were going to gain influence and international presence for two reasons. The first was the pace of internal institutional reform; in different ways, each of the BRIC countries began to think about fiscal discipline, competitiveness, and the insertion of their economies into the international order. The second was external. An extraordinary period of economic growth and financial diversification characterized most of the years of the first decade of the new century.
Obstacles along the Road
The road to "BRIC-dom" was not without challenges. The 1990s saw the rise of the Asian Tigers, in particular the apparently inexorable rise of Japan, and much was made of a new model of economic growth and development. This first phase of rapid growth collapsed in 1997 with the financial crisis that erupted in Thailand in July of that year. The contagion spread across Asia and into 1998 (bringing down Japan in the process), it hit Russia in mid-1998, and it finally ended with the collapse of the Brazilian currency in January 1999. The IMF stepped in with a series of draconian conditions that drove most economies into a freefall. The crisis also opened a wide-ranging debate about the role of the multilateral institutions, their misunderstanding of the crisis, and their politically inept day-to-day handling of the situation on the ground.
While Brazil was the Latin American country most affected by the 1997-98 Asian crisis, the region had its own causes for malaise. Formulated in the late 1980s and early 1990s, the so-called "Washington consensus" provided a blueprint of market-oriented reforms that should have led to increased competitiveness, greater job growth, and poverty reduction. But it did not work out that way. By the time of the July 1997 crisis in Thailand, the consensus had been rejected by many in the region. It had indeed led to the privatization of public assets, increased the flow of FDI, and addressed many of the necessary, but insufficient, technical aspects of economic management. However, overall most Latin Americans deemed it a failure because the reforms did little to improve their daily existence. The first ominous sign of the depth of that rejection came with the democratic election of Colonel Hugo Chávez as president of Venezuela in 1998. A key component of his campaign was a rejection of the Washington consensus and the "savage capitalism" imposed on developing countries by the industrial states.
The various crises created a legitimacy issue for the G-7 and their institutions. A series of books challenged the assumptions of the development models of recent years and called for a complete rethinking of both ideas and institutions. The developing economies became increasingly dubious about the leadership of the West, its multilateral financial institutions, holdovers from the end of World War II, and the argument of "raw," market-driven development. Many developing countries viewed with growing skepticism the mantra that peace, democracy, and free markets would dominate the century. As a global recovery began in the first years of the twenty-first century, old assumptions were cast aside, and recovering countries looked to their own models for growth. Among those taking the lead were Brazil, China, India, and Russia.
After a severe financial crisis in the early 1990s, then finance minister Manmohan Singh of India opened a process of reform and liberalization that continues today. His reelection in 2009 as prime minister should further consolidate the reform process. Deng Xiaoping in China began to allow market forces into agriculture in the late 1970s. That decision unleashed the phenomenon that is China today. The take-off took place under the leadership of Hu Jintao, the paramount leader of the People's Republic of China. His fourth generation of leaders rose to power in 2002 when Hu was chosen as the general secretary of the Communist Party of China. Vladimir Putin became president of Russia in May 2002. The collapse of the Soviet Union in 1991 buried the old communist state but began a decade-long phase of chaos and drift. Putin created a new semi-authoritarian state that restored the country's confidence and opened a period of relative economic stability.
In Brazil, after decades of poor economic management and feckless governance, a turning point took place in 1993-94. Finance Minister Fernando Henrique Cardoso and a team of young reformers introduced a new economic and financial program that promised to control inflation and prepare the country for economic growth. The Real Plan-and the name for the new currency-stunned the country, and the world, with its immediate success. It also provided the political platform for the election of Cardoso as Brazil's president at the end of 1994. When his second term ended in 2003, much progress had been made, while many opportunities had been overlooked or missed.
The Goldman Sachs analysis clearly reflected the new trends. As the 2003 Goldman Sachs report pointed out, India's economy could be larger than Japan's by 2032, and China's could be larger than the U.S. economy by 2041 (and larger than everyone else's as early as 2016). The BRICs' economies taken together could be larger than that of the G-6 in 2039. The key assumption of the analysis was that the BRICs would maintain growth-supportive policies that included sound macroeconomic policies and a stable macroeconomic background, strong and stable political institutions, openness, and high levels of education.
But even in 2003, there was caution regarding Brazil's prospects. Compared to China and the other Asian economies, Brazil was much less open to trade, investment and savings were lower, and public and foreign debt were much higher. On the trade question, the tradable goods sector in China was almost eight times larger than that in Brazil, when measured by imports plus exports. Brazilian savings and investment ratios were about 18-19 percent of GDP, at that time, compared to an investment rate of 36 percent of GDP in China and an Asian average of around 30 percent. Goldman Sachs made clear that without a deeper fiscal adjustment and lower ratio of debt to GDP, the private sector was almost completely crowded out from credit markets. China's net foreign debt and public debt were both significantly smaller. Also, 2003 was the first year of the government of President Lula. As we shall see, the transition from Cardoso to the Workers Party government in late 2002 was precarious, with international markets deeply concerned about the possibility of "socialist" antimarket policies in Lula's Brazil. Although he quickly neutralized those fears, in 2003 Lula was still in the process of consolidating his fiscally conservative regime and his support for outward growth strategies.
Excerpted from The New Brazil by Riordan Roett Copyright © 2010 by Riordan Roett. Excerpted by permission.
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